Every month, itâ€™s the same thing. You deposit your pay stub and the next day, nothingâ€™s left. If your monthly payments are too high and you are struggling at the end of each month, the consolidation loan might be an option. In this article, we will explore this financial tool and the idea behind it.

Definition

A consolidation loan is a regular personal loan. The main difference lies within the need. This type of loan is used to pay off other debts such as credit cards, lines of credit or other personal loans. In many cases, the individual accumulated too many debts on his revolving credit account and wants to be brought back to a define monthly payment.

The rate and term of the loan are determined by the regular personal loanâ€™s rules. The bank might charge a higher interest rate as this type of loan is more risky for them. As the main goal is to regroup all debts under one loan and decrease the payments, most loans will be on a five years term.

Needs

As previously mentioned, the consolidation loan was created to pay off other debts. This is the main reason why financial institutions will most likely request to close all revolving credits. This financial product helps to decrease monthly payments but also forces you to respect a budget.

In fact, by cutting off your credit cards, you will decrease significantly your psychological buying power. I use the word â€œpsychologicalâ€ as many individuals consider their granted limit or their credit cards as a mean to finance goods. Some people literally use them as they were with unlimited funds. The personal canâ€™t be increased unless you apply gain for more money. Therefore, you will be more controlled over you spending habits.

Qualifications

As long as you donâ€™t wait until the last minute, you should be able to qualify for a consolidation loan based on your credit rating and your TDSR. Most institution will consider your TDSR after consolidation. Unfortunately, we often see people applying for this kind of loan when they already missed payments or when they have too many debts to consolidate. My advice to you is to consolidate your debts as soon as you realize that you wonâ€™t be able to pay more than the minimum payment required on your credit cards. You should also close any revolving accounts in order to re-establish a well balance budget.

Negotiation

When an individual applies for a consolidation loan, it means that he definitely needs the help from others. This immediate need for credit reduces his negotiation power to nil. Several lenders will make a â€œtake it or leave itâ€ offer. If you really need this loan, you will have to take it as offered.

To conclude on the consolidation loan, I must remind you that the faster you consolidate the better your chances to get rid of your debts are. The consolidation is the action of bringing together more than one debts. That will help to reduce your monthly payment and will put you on a fixed repayment schedule. Be sure to not waste the money saved by consolidating. If you do so, you will be soon in the same bad situation and you might not be able to consolidate your debts again.